PSIRU – University of Greenwich 03/01/2000
Water and privatisation in central and eastern Europe, 1999
Author(s): David Hall and Emanuele Lobina
Date: 26 September 1999
Commissioned by: Public Services International (PSI)
Funded by : PSI
Presented at: PSI conference on water industry, Bulgaria, October 1999; and OTV conference on water industry, Essen, October 1999
Published:
Notes: A German version of this paper is available, courtesy of OTV. Parts of this paper are based on a paper presented at the Stockholm Water symposium in August 1999, which will be published in spring 2000. A copy is available on request. [1]
Water and privatisation in central and eastern Europe, 1999 1
1. Water and sewerage in CEE 4
¨ Major developments in 1999 4
¨ Privatised water and sewerage concessions in central and eastern Europe, September 1999 4
¨ Municipal water companies restructured, not privatised, in central and eastern Europe September 1999 5
2. Trends and developments by country 5
A. Hungary: prices and investments – Szeged dismiss Vivendi, problems in Budapest 5
¨ Szeged: municipality dismisses Vivendi, creates municipal company, gets EU finance 5
¨ Budapest: prices, secrecy, finance 5
¨ Debrecen: efficient municipal water company 7
B. Czech republic: takeover battles and price rises 7
¨ SCVK - sold by Hyder to Vivendi; control, expansion and prices 7
¨ VAKJC - Anglian increase stake, increase prices. 7
¨ SMVaK: Anglian beat Suez-Lyonnaise in takeover battle 7
¨ Prague: tenders soon? 7
C. Poland 7
¨ Bielsko-Biala: municipal water company 7
¨ Poznan - delayed tenders 7
¨ Gdansk/Lodz: public and private price comparisons 7
3. Developments in other countries in CEE 7
¨ Bulgaria 7
¨ Romania 7
¨ Estonia 7
¨ Russia, St Petersburg 7
4. Developments elsewhere in the world 7
¨ Africa 7
¨ Asia-pacific 7
¨ Latin America 7
¨ North America 7
¨ Western Europe 7
5. Key issues 7
¨ Control 7
¨ Prices 7
¨ Finance and investment 7
¨ Efficiency of municipal enterprises 7
6. The municipal water company: a booklet 7
7. Notes 7
1. Water and sewerage in CEE
¨ Major developments in 1999
· Termination of Vivendi’s concession by Szeged city council
· Municipalities assert themselves against multinationals: Szeged, Budapest, north Bohemia
· Takeover battles and share deals of water companies in Czech republic
· Problems with prices – Czech republic (south Bohemia), Hungary (Szeged, Budapest)
· Municipal companies access investment finance – Debrecen, Lodz, Szeged
· New tenders expected – Sofia, Praha, Poznan, Tallinn
¨ Privatised water and sewerage concessions in central and eastern Europe, September 1999
Country / Concession / Company / Multinational / Per cent owned / Bought in 1998 or 1999Czech republic / Brno / Brno VaK / Suez-Lyonnaise / 31
` / Ostrava / Ostravke VaK / Suez-Lyonnaise / 40
Jihomoravske VaK / Suez-Lyonnaise / 34
Karlsbad / Vodarny Karlovy Vary / Suez-Lyonnaise / 49.8
Severomoravske VAK / Suez-Lyonnaise / 45
Severomoravske VAK / Anglian Water / 53.4 / 1999
Southern Bohemia / VAKJC / Anglian Water / 92.7 / (1999)
North Bohemia / SCVK / Vivendi / 43 / 1999
Aqua Servis / Vivendi (via SCVK) / 27.2 / 1998
VaK Kladno-melnik / Vivendi (via SCVK) / 17.7 / 1998
VaK Mlada Boleslav / Vivendi (via SCVK) / 22.9 / 1998
SVS / Vivendi / 100 / 1998
Vodospol Klatovy / Vivendi / 100 / 1999
AQUA Příbram / Vivendi / 100 / 1999
VOSS Sokolov / Vivendi / 100 / 1998
Pilsen / Vodarna Pilsen / Vivendi / 98
Hungary / Kaposvar / Eaux de Kaposvar / Suez-Lyonnaise / 35
Pecs / Pecsi Vizmu / Suez-Lyonnaise / 48
Budapest / Budapest Water / Suez-Lyonnaise/RWE / 25 / 1998
Budapest / Budapest Sewerage / Vivendi/Berlin Wasser / 25 / 1998
[Szeged] / [Szegedi Vizmu] / [Vivendi] / [49] / [terminated]
Poland / Gdansk / SAUR Neptun Gdansk / SAUR / 51 / 1992
Slovenia / Maribor / Aquasystems d.o.o / Suez-Lyonnaise/Steweag / 100 / 1998
Source: PSPRU database
¨ Municipal water companies restructured, not privatised, in central and eastern Europe September 1999
Country / City / Water company / Date of restructuring / Investment finance fromPoland / Lodz / (Lodz water company) / 1994 / Polish National Environmental Fund
Poland / Bielsko-Biala / Aqua S.A. / 1990 / World Bank
Hungary / Debrecen / Debreceni vizmu / 1994 / Commercial bank, EIB, EBRD,
Szeged / Szegedi Vizkozmu / 1999 / Commercial bank, government, EU (ISPA)
Moldova / Chisinau / Chisinau Water / 1997 / EBRD
Lithuania / Vilnius / (Vilnius water) / 1998
2. Trends and developments by country
A. Hungary: prices and investments – Szeged dismiss Vivendi, problems in Budapest
¨ Szeged: municipality dismisses Vivendi, creates municipal company, gets EU finance
The city council of Szeged has decided to terminate the concession to Vivendi’s subsidiary, and take back the operation of the water company in-house.[2] This is the first time that a water privatisation has been reversed in central and eastern Europe.
The key issue in Szeged is the extension of the sewerage system, which currently serves 65% of the population. The city council wants to extend it to provide 80-85% coverage. This work has already been financed by the city council taking out a loan, and obtaining government support. One of the advantages of getting rid of Vivendi is that the city council will be able to invite competitive tenders for the works, instead of being forced to give the job to Vivendi .[3] The development will also receive finance from the EU’s pre-accession fund, ISPA. [4]
¨ Budapest: prices, secrecy, finance
The companies have demanded high price rises,[5] which the council and consumer groups are resisting - but the council is obliged to make good the companies' losses: " Budapest city councillors and local organisations say that there is no justification for the multinationals to increase the charges for water and sewerage so excessively. …. Mikios Szalka, vice-president of the municipal maintenance committee, said that: "It is now clear that this kind of privatisation, by 25-year concession of management rights, was a mistake. Budapest City is consulted about price increases, but development finance was expected from the powerful foreign investors. However, the new price increases show that the companies do not want to provide finance for development. The sewerage company has proposed a 25-30 per cent price increase, and the main argument for this is the costs of development...Unfortunately, it is now clear, that these powerful foreign companies do not want to make investments using their own capital - on the contrary, they take as much money as possible from the country, including their management fees." [6]
In June 1999 the council refused to approve a business plan for the water company (Fovarosi Vizmuvek (Budapest Waterworks) – 25% owned by Suez-Lyonnaise and RWE). The council refused to approve the directors’ pay: in 1998 the company had made a loss but was forced to pay 250m HUF in profits tax because of the fees paid to directors, which are treated as profits. The company expects to make another larger loss in 1999, despite price rises. [7]
The water concession already has inflated prices because the council accepted the tender which paid the highest amount to the council for the shares in the company (3 billion HUF), although this tender also proposed the price of water being higher (by 3 HUF per m3).[8]
Budapest city: Increase in water and sewerage prices, 1994-1999
1994=100
Year / Water / Sewerage1994 / 100 / 100
1995 / 165 / 190
1996 / 170 / 235
1997 / 220 / 300
1998 / 275 / 350
1999 (forecast) / 300 / 410
Trade unions are demanding a total renegotiation of the contracts - which are kept secret from the public: "Contracts relating to the handling of self-government assets are not open for everybody, said Ferene Kovago the chief engineer of Central Asset Agency of Budapest City. If somebody wants to have a look to these documents, permission of the contracting bodies is required. Contracts relating to privatization are top secret documents, even we are not able to read them, he added…..In Budapest the management costs at Budapest waterworks caused indignation. Water and sewerage fees will be increased considerably next year. Trade union leaders said that privatization contracts should be made open for the publicity on one hand and a deep revision is necessary, on the other’ one." [9]
The multinationals have financed the cost of their shares in the companies by raising loans from the banks - and the EBRD. The cost of investment in the sewerage system is being financed by the World Bank [10] and by the EU’s adjustment fund, ISPA. [11] The world bank loan is being taken out by the city council, not by the water company, and is guaranteed by the government. [12]
The partial privatisation of the Budapest sewerage company involved selling 25% of the shares to a joint venture between Vivendi and Berliner Wasser Betriebe, who have created a special holding company, and have persuaded the EBRD - created by the EU to help fund development in central and eastern Europe - to buy 30% of this special company. In a complex arrangement, the EBRD is investing ECU22.7m, 30% of the special company's funds, and taking some of the equity risk as well: "The Bank's equity instrument is a hybrid of: portage - a predetermined Libor-based return, with a put to the sponsors; and real equity - with the outcome depending on actual returns and the market value of shareholding at exit, but carrying some political and regulatory risk. "[13] Vivendi is in effect only putting up 9% of the equity - the rest is held by the city council, Berlin Wasser, and the EBRD - all public sector bodies.
In respect of the water privatisation, where 25% was again sold to a consortium, headed by Suez-Lyonnaise, the cost was finally financed by Lyonnaise raising a bond. [14]
¨ Debrecen: efficient municipal water company
In July 1995, Debreceni Vizmu (Debrecen Waterworks Incorporated Company) was created as a separate entity from the municipality, with a proper evaluation of assets. The company is now well-established, has financed and carried out major investments, and is operating efficiently.
The table shows the financial performance of the company in the last two years of operation. Table 6 allows to compare Debreceni Vizmu’s overall performance with that of three Hungarian privatised water companies. Those are Eaux de Kaposvàr and Pécsi Vizmu, both subsidiaries to Lyonnaise des Eaux, and Szegedi Vizmu. Overall, Debreceni Vizmu appears no less efficient than the privatised water companies.
Debreceni Vizmu, comparison with privatised water companies in Hungary, 1998
Company / Debreceni Vizmu / Eaux de Kaposvár / Pécsi Vizmu / Szegedi VizmuCity / Debrecen / Kaposvár / Pécs / Szeged
Ownership and control / Municipal / Private / Private / Private
Population, ‘000s / 222 / 73 / 183 / 174
Population served with potable water, ‘000s / 220 / 73 / 170 / 174
Population served with sewerage, ‘000s / 177 / 46 / 146 / 109
Length of pipeline, km / 572 / 249 / 781 / 643
Length of sewer network, km / 337 / 131 / 365 / 309
Total value of equipment used, HUF million / 9,647 / 2,492 / 7,922 / 5,685
Full time labour / 558 / 142 / 409 / 238
Average monthly wage per capita, HUF / 80,095 / 67,093 / 74,456 / 75,260
Tariff for water per household, HUF/ccm, 31/12/98 / 97 / 78 / 130 / 75.3-73.9
Sewerage fee per household, HUF/ccm 31/12/98 / 60 / 52 / 77 / 53.1-53.3
Net income from water supply, HUF million / 2,165 / 659 / 2,114 / 1,036
Total net income, HUF million / 2,343 / 727 / 2,385 / 2,107
(Source: Debreceni Vizmu, 1999)
Debreceni Vizmu, profits, 1997-1998
1997 / 1998Operational result / 56,994 / 201,485
Result of financial transactions / -37,323 / -56,701
Usual contracting result / 19,671 / 144,784
Extraordinary result / 18,188 / 3,423
Pre-tax profit / 37,859 / 148,207
Result according to balance sheet / 34,687 / 129,352
Note: ‘000s HUF(Source: Debreceni Vizmu, 1999: 9)
The cost of investments has also been lower than would have been the case under privatisation.
· The relative cost of financing the necessary investments has proved to be much lower under public provision. Investments were in fact determined by Debreceni Vizmu’s management on the basis of an assessment of technical needs, rather than on profit maximisation. 23 kilometres of pipework had been finished by April 1997, at a cost of HUF 320m, equal to 40% of the amount Eurawasser would have spent on the same work.
· the purchase of local supplies rather than French-manufactured equipment, such as meters, has proved more cost-effective. For example, plastic pipes were purchased at 30% less than the French TNCs would have paid, with no transportation costs. As a consequence, the infrastructure had been developed more extensively while prices resulted 75% lower than offered by the private concessionaires.
B. Czech republic: takeover battles and price rises
The most marked development in the Czech republic this year has been the trading of shares in water companies in a series of takeovers. This has been driven by two multinationals – Vivendi, which now owns a substantial section of the Czech water industry; and Anglian water, which has surprisingly decided to expand its presence in the Czech republic.